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Wednesday, May 28, 2008

THE VIEW FROM NEW YORK

Behind the failure of the Japanese economy


Takafusa Shioya has sent me his book published last year, "Keizai Saisei no Joken" (Conditions for Economic Recovery). Nearly three decades ago, during a period of a few years when Jimmy Carter's presidency morphed into Ronald Reagan's, he was stationed in the New York outpost of a Japanese trade office where I work. We have since remained in touch.

Shioya entered the Economic Planning Agency upon graduating from the Law Faculty of Tokyo University in 1966 and was placed with a round of other agencies, as "career bureaucrats" typically are, before attaining the highest rank of administrative vice minister, in 1998.

Throughout, he remained a close analyst and observer of the Japanese economy. Now a professor, he decided to respond, belatedly, to the question Prime Minister Ryutaro Hashimoto once asked, "Tell me how the Japanese economy has ended up in this mess." The result is the book: an exploration of factors that might have led to Japan's "economic failure at the end of the 20th century."

As he quickly notes, though, Shioya does not entirely agree with the term often bandied about, "the lost decade." He points out that during the period the Japanese economy registered two stretches of growth, from November 1993 to May 1997 and from February 1999 to October 2000.

The former, in fact, was the third longest economic growth in postwar Japan. He also reminds us that even during Japan's double-digit growth period of the 1960s, the economy stalled sharply for a while, albeit not for long.

The 1990s was a period of economic doldrums nonetheless. It was during the decade that dismal terms such as kakaku hakai (price destruction) and kakaku houkai (price collapse) came into being. The situation was all the more painful to the Japanese because it followed the giddying heights their economy attained during the preceding decade — the "euphoria" it had engendered that Japan had finally caught up with the West.

One estimate has put the loss in stock and land valuation as a percentage of national wealth in the three years following the bursting of the bubble alone at 80 percent of the material loss as a percentage of national wealth during the Pacific War. Shioya, at any rate, is not content with simply contrasting the two decades of the steep climb and the precipitous fall to analyze what caused the latter.

His examination goes back to the high-growth era of the 1960s in the midst of which he joined his agency, and even further. In doing so, he pulls some surprises. Foremost among them to me is this: Just one day after Japan's defeat, on August 15, 1945, a group of economists assembled at a government office to look at "the basic issues for Japan's economic reconstruction." Their report, which came out eight months later, noted, among other things, that the abolishment of the military and the loss of colonies would be a plus for the economy because it would mean that much less of a burden on it. Talk about "transforming a disaster into a blessing"!

Given this perspective, I can't help looking back on my life. I was born in Taiwan during the war, after all, and my life since has typified that of much of my generation.

The country defeated, my family became part of the vast horde of refugees. Finally reaching Japan, we for a while lived on the second floor of a stable. My father, a former officer of the Special Higher Police, had to move from one job to another for several years. The Occupation did not simply disband the dread "thought police," but also "purged" him. But in the ensuing decades I became the greatest beneficiary in my family of Japan's economic transformation: I went to college.

Even so, toward the end of the 1960s, when a young American couple invited me to this country, my father, though by then a member of the upper stratum of Japan's middle class, gratefully accepted their offer to take care of my expenses as long as I remained here. Two decades later, I learned that the owner of a small business in Kyushu, whom I knew in high school, had made a similar offer to a young American student.

"Changing Fortunes" was the title of the book Paul Volcker, former chairman of the Federal Reserve Board, and Toyoo Gyohten, former vice minister of the Ministry of Finance, published jointly, based on a series of lectures they'd given at the Woodrow Wilson School. The book came out in 1993, and by then fortune was indeed changing, again, though in the opposite direction of what they had meant. But not many people had yet to realize it. I certainly enjoyed the book, reading it with some tickled pride.

Shioya's story really begins with what he found at the Economic Planning Agency when he joined it. The ranking officials were fretting: There are no signs of economic recovery! Not many noneconomists today may remember it, but there was a "1965 recession" in the midst of that vaunted high growth. It was created by the excessive capital investment in the preceding years. In that and other respects, what Japan would experience in the 1990s would be similar. The problem, in retrospect, is that certain measures taken to deal with it worked at the time, but not later. Two earlier actions would cast long shadows on the economic troubles of the 1990s. One was the issuance of a "special government bond," the other the rapid spread of cross shareholdings that Japanese corporations adopted to prevent foreign takeovers in the impending capital liberalization. Shioya also points to the creation, during the previous spur of economic growth, of a "land myth" — that the price of land would never go down.

The myth would play its demonic role during the bubble of the 1980s.

That bubble of course was compounded by the Plaza Accord, the U.S.-led international agreement in 1985 to force the yen to appreciate. Some who seek the primary cause of the bubble in it call it money haisen, "defeat in a money war." About that, however, Shioya wonders: Did Japan, which by then had put itself in such an intractable position, have any "policy freedom" in effectively dealing with the outside demand? What happened in the end was the opposite of Murphy's Law: The characteristics that had worked for "Japan, Inc." worked against it: lifetime employment, seniority system, "the convoy system," the "iron triangle" of government, and bureaucracy and business working together.

Shioya was adviser to Ryutaro Hashimoto whose policy misjudgment — an echo of a 1965 action — created "the great recession" that led to his downfall. He says he has written this book as "a requiem" for the ill-fated prime minister who died suddenly, in 2006, of medical complications.

Translator and essayist Hiroaki Sato is senior research fellow at JETRO New York.


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